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- [00:00]
Will Smith
When today's guest set out to buy a business, he identified the education market as a target industry. Schools fill their classrooms with students year in, year out, so there is reliable demand for products and services to educate those students. It was a simple premise, and it turned out to be on the nose. The first business Matt Kopp bought provides organic samples for science classrooms. Think vials of pond water or yes, frogs for dissection. It generated about 350,000 in cash every year on 2.2 million in revenue steadily.
- [00:43]
Matt Kopp
A good solid little business, as Matt put it.
- [00:47]
Will Smith
That was 2019 and we hear how Matt parlayed that into a portfolio of similar businesses which today generate about 2 million in EBITDA and all have managers in place. After six years of matt running hard, today Matt's businesses run themselves. A few themes to listen for Matt's willingness to let people go if a business he acquires is bloated. This is something we don't talk about much. We're often more concerned with retaining people.
- [01:20]
Matt Kopp
In a target business, not cutting them.
- [01:23]
Will Smith
So it's valuable to hear how Matt dealt with a situation where he felt there were too many people doing too little work. ETA in a less mature market. Matt is in Australia, where the lack of buyers and searchers and access to debt means that multiples for small businesses are low. If you can figure out where to get debt and raise Equity, multiples for sub $1 million EBITDA businesses should be 2 to 3x and finally, why the education market is appealing for searchers. Okay, please enjoy this conversation with Matt Kopp, Managing Partner at Enduring Investment partners. Just over one week left before M&A Launchpad's spring show. M&A Launchpad is a one day event that brings together business buyers, owners and investors. Panels on the entire cycle of acquisition entrepreneurship from acquiring and growing to exiting and investing. Walker Deibel, author of Buy Then Build is one of the keynotes and 30 other experts will be on hand sharing their expertise. M and A Launchpad is a single day. It's next Saturday, May 3rd in Houston.
- [02:42]
Matt Kopp
Houston.
- [02:43]
Will Smith
Get a 200 discount off your ticket with the code Acquiring minds. Go to malaunchpad.com and use the code acquiring minds. All one word or use the link in the show notes welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. What do the following Acquiring Minds guests all have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursam. They all went through the Acquisition Lab, the accelerator in community for people serious about buying a business. But they represent just a sliver of the Lab's success stories. The number of deals across the Lab's cohorts now stands at over 120, with over $300 million in aggregate transaction value. The Acquisition Lab was founded by Walker Deibel, author of Buy Then Build, the book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with advisors, live deal reviews with Walker, deal team introductions and an active community of serious searchers. Check out acquisitionlab.com, link in the notes or email the Lab's co founder, Chelsea Wood.
- [04:22]
Matt Kopp
Chelseauythenbuild.com Matt Kopp welcome to Acquiring Minds.
- [04:29]
Walker Deibel
Thanks Phil. Thanks for having me.
- [04:30]
Matt Kopp
Matt, you bought your first business the year before COVID hit so 2019 and.
- [04:37]
Will Smith
Haven'T really let up.
- [04:39]
Matt Kopp
Yours is a very entrepreneurial journey into buying businesses. Let's begin.
- [04:47]
Will Smith
What led you to search for a.
- [04:49]
Matt Kopp
Business to acquire in the first place?
- [04:52]
Walker Deibel
I think I'd always sort of had entrepreneurial sort of spirit through my, through my sort of childhood. Always worked, you know, sort of odd jobs from sort of 13, 14 years old and always had been around business owners. My uncle had his own sort of metal fabrication company so I always used to work there as a kid and just sort of got to really understand what small business was early on going through sort of, you know, university, then, you know, getting my first job in finance. It was always sort of good to sort of see, you know, I was like resonated with the business owners who we were doing deals for. That seemed to be something that I sort of eventually aspired to be and then did my MBA and learned about search via my mba. And I sort of said that was something that would be interesting to do. Didn't think it was sort of real. The Australian market didn't really have that sort of environment that existed back when I started doing my MBA in 2015. So I joined a consulting firm then eventually worked for what's sort of comparable a Walmart in the Australian market ran a P and L. So effectively, you know, had ran all the trucks and the warehouses for Walmart equivalent called Coles in Australia. And that was a really sort of, you know, proper, you know, sort of top 20 company on this Australian stock market. So you know, big environment, big corporate environment. It just wasn't, wasn't for me. I sort of, I knew that I wasn't fit for corporate. Really, really early on, I guess I was, you know, I was always thinking smarter and harder than most people. But I think in a corporate world, that doesn't necessarily mean it gets you up to the sort of, you know, the ladder. You need to sort of be a bit more political, sit on your hands a little bit more and just listen rather than just do. And I think that what sort of led me to sort of say, hey, maybe I should really try this ETA path. So in 2018, I tried to raise what's like a traditional search fund in the Australian market that hadn't been done before.
- [06:36]
Matt Kopp
And, and, and you had heard about your exposure really is by. Is the books coming out of the States and what you're reading about the model from the States.
- [06:46]
Walker Deibel
Yeah, 100%. So we, we, we had, I took a, a thinking like an entrepreneur class in my mba, went to school, did my mba, called at Melbourne Business School, which is one of the leading MBA programs in the Australian market. And we had a subject called thinking like an entrepreneur and search funds, or eta was one like one, one week effective that we went through. So. And that's where I got introduced to the Harvard business sort of how to buy a small business. That became my bible, much like most of your other sort of talkers on your show. And I just sort of took it. I'm like, wow, this is great. And that's where I sort of got through to the Stanford primer and then just started doing Google Desktop research on what is this search fund thing. I got to the point where, as I said, going back in 2018, I'm like, okay, I want to really do this now. I reached out to the relay. I rented out Pacific Lake. I spoke to Jan Simon at Von before he had Vonzio at the time and talked to him about how I really want to sort of, you know, create the Australia's first, you know, search fund. I think the premise was that they were interested in the Australian market at the time, but they wanted to have Australian investors who were also understanding of the model that they could effectively rely on to be like the backstop and cornerstone in the Australian market. My networks at the time, everyone was, we'll back you, but give me a deal first. So this whole premise of search capital just didn't really exist in the market. So rather than sort of me trying to sort of keep knocking on doors and trying to get this sort of cornerstone Australian investor that the sort of institutional American guys asked me to do, I sort of said, I'll just Start searching anyway. And that's sort of. Yeah, so that sort of eight month process, I quit my job.
- [08:18]
Matt Kopp
And Matt, how were you envisioning acquiring the business once you found it? Going to these Australian investors who said bring me a deal and I'll consider investing. So doing it that way.
- [08:26]
Walker Deibel
Yeah, just going through sort of in a standard sort of, you know, single just yeah, find a deal and you know, make it work effectively. So I quit my job, I had sort of enough money sort of back myself in and I sort of had gave myself like 12 month burn rate to sort of go and try and find something. And yeah, that's sort of how we, you know, came across the business. I came across, it was, it was a bit of an interesting search process. You know the way I.
- [08:49]
Matt Kopp
Well I want to hear about that in just a sec. So this is all 2018, really 2018 into 19. And so at that point in the Australian market, I've had a couple Australians on it. There's, there was really. You were out there by yourself. No one really to talk to about this. Right. And it sounds like even at that time there had been no traditional search fund that you were aware of ever in the country.
- [09:14]
Walker Deibel
There was no. Yeah there was. There was a couple of people who were in a similar situation to me. Like we were on. We met a couple of Australians. I met a couple of Australians on Search Funder. So I signed up to Search Funder and sort of, you know, at that stage Search Fund I was like everyone was in the States and then you might like find 3, 3 marks in the Australian market. Right. Like that was it. And so you know, we sort of started to get together and have some conversations with people about you know, how are we going to do this, what are we going to do? I think everyone has sort of come across ETA through the same, similar types of things via an MBA program. I think one person was in insead so he was aware of it because they had a fairly large ETA sort of, you know, program there. So yeah, very, very lonely we'll call it and really not, not much support going through the process.
- [09:56]
Matt Kopp
Well okay, so great, let's now hear about the search because also just business buying in general is less mature, let's call it than, than, than a US market for example. And so, so there is no biz buy sell to turn to or, or otherwise or even the brokers fill out flesh that out for us. What's it look like to search?
- [10:15]
Walker Deibel
Yeah, so we had a similar sort of, not at the same level of biz by sale. But there are some type of, there were some online, online platforms that did have business, commercial business for sales. Most of those were like fish and chip shops or hospitality sort of ventures. You wouldn't really find good businesses for sale. You know there is definitely a business broker market in the Australian market. But it was very, very hard to cut through to those guys especially. I was a 27 year old, didn't really have any business experience. To try and sort of penetrate that sort of that wall that exists with the business brokers is really, really hard. I found also with the business broker deals that I actually got to have a look at, it was great learning to sort of start to have a look at different types of P&L's and understand different types of industries. Because I was agnostic. I was like, just give me a business, I'll make it work. You start to sort of see that like you know the IMs and the SIMs that come through, like what are these things? Like these are nothing that I sort of initially when I was in corporate advisory we had like at least really, really good pitch decks that were sort of going out. These things look like no, no offense to the Australian business. Brokers are probably listening but 12 year olds will probably put them together. And so for me it was like, well, you know, this is. That didn't really appeal to me I think so. I think again because I'd been sort of reading about the way search funds have worked in the States. Everyone had really been proprietary. Search is the only way to really go and try and find a good deal. So, so that's all I sort of assumed that I needed to do. So I sort of put the business brokers aside from day one and said I'm just going to do what all the other searches before me who have gone and got all these great returns is just try and apply it to the Australian market. So creating databases, you know, the Yellow pages was a really good sort of thing. I found an online yellow page scraper where I effectively just got all the leads from yellow pages and just started like picking up the phone and trying to find emails for these people and just started sending them emails. That was just like a really sort of bazooka approach. Just trying to find anything that I actually could. That was the first sort of three months. Then I found a database that effectively had all the Australian business owners names and their sort of estimated revenues and employee size. I'm like hey, this is starting to get somewhere. And then just started doing a proper sort of cold email Cold outreach to certain types of industries. I sort of landed on healthcare and education as industries that I sort of wanted to play in. And that was really more around buying my first business in the Australian market. No one will support. I've got to try and sell this to these investors who don't really buy in this sort of small space normally anyway. At least if I have like a thematic around a safe, resilient sort of proof industry, at least I might be able to get some sort of, some help from them or some capital and sort of taking back from like the sort of how to buy business from Rick and Royce. The way they sort of say, you know, look at a P and L and go down to the bottom of the P now because these sort of, you know, areas are generally where you'll find that no one's looking to sort of cut, cut costs. So therefore they're probably sticky revenue, you know, reoccurring in nature. And I don't know what happened. I was just scouring the Internet trying to find, you know, health care, profit and loss statements, private hospitals, looking at schools, and I came across a couple of school PNLs. I was like, okay, let's have a look at this. Just where do schools spend their money? And that's where I sort of came down. You know, down, right down the bottom line, like this sort of lab resources and you know, lab supply and school, school science supply. And you know, I sort of started sort of doing some more research on it and they have like, you know, budgets in the Australian market. You know, schools that spend anywhere between 20 and $50,000 a year on their science resources, glass, microscope, speakers, all those types of things. I'm like, this seems like a fairly cool niche type of industry to sort of play. Yeah, yeah. And then just sort of like just googling like school supplies online, trying to find out how many existed. And I found that there wasn't really many. It was a really, really shallow market. So not fragmented as you know, sort of people sort of say that you need to be go and buy a fragmented, you know, space. So there's like 30 companies that I found in the Australian market, this is like, that had a digital presence. I guess there's, I ended up finding out more. There's many more that just didn't have a digital presence. And uh, yes, eventually contacted one of the vendors that called Southern Biological. So and there was like a contact that owner a few times on an email.
- [14:22]
Matt Kopp
Matt, let me, let me stop you before we hear about Southern Biological in general. The proprietary Outreach, Were you getting responses?
- [14:30]
Walker Deibel
Yes, 100%. We were like, it was, it was really, really interesting. I think. No, this is 2018. This is before anyone was probably really trying to go down that process of contacting small businesses. I had no really idea how big these businesses were. But I would imagine someone, you know, with a business that's making 3 to 5 million of revenue, you know, around, you know, sub million dollars of EBITDA a little bit higher, they're probably not getting people emailing them that often saying, hey, I want to buy a business. And I sort of took the approach when I did my outreach and still do it today and it works is that I didn't really come across as a private equity person. I literally like in the subject line is let me buy your business. My name's Matt, I want to buy your business. I think it's great. Contact me if you're interested. What I used to do though is I used to track email open rates. It was a bit of a sort of a sneaky sort of way of doing things. But I would sort of be sending these emails out and I'd get an alert if someone had opened the email. And then if someone, for some reason I've been noticing this sort of pattern recognition. So people will keep opening up the same email four or five or six times even though it says like, you know, five or six things. And as soon as someone had kept doing that, I'd be like, I'm going to pick up the phone and call these people. And so then I call these people straight away and say, hey, how are you? You know, you get to the gatekeeper and normally the gatekeeper would sort of be do a good job. But when people have just written recently opened this email, you say, hi, I'm Matt from, you know, wherever I was at the time, I'd like to speak to this person's name. You get through and they're like, I'm just reading this email now. You're like, it's meant to be fake then, isn't it? Right? Like, because these old people generally, they don't realize, you know, 60 year old person doesn't, most of them anyway don't realize that, you know, you're tracking their open rates on their email. And so that was a really, really good way of actually getting cut through just tracking email opens. And then if you can call them as soon as an opens occurred because you might be front of mind then, and you actually can at least then have a conversation because a lot of the time when you're speaking to these people, they think that it's a scam most of the time. So you need to try and cut through that really quickly. And I was always quite personal when I could have a conversation with these people and I really sort of got through and you know, it's just turning the page one page faster than them. Like, you know, they ask questions like, why do you want to buy my business? At times I didn't even know what business I was speaking to. I was like, I've got to research this business, you know, before I even just sound that I had some type of credibility. But yeah, I ended up speaking to probably say 40 business owners over that sort of period of time that was actually went past sort of the initial stages where there was some level of interest and then yeah, landed on Southern.
- [16:55]
Matt Kopp
And do you think that today, seven years later, you'd have the same luck outreaching to cold, outreaching coal to business owners or do you think that it's congested as it is here?
- [17:07]
Walker Deibel
No, definitely not congested. Yeah, so I still use the same approach now doing what I'm doing. Joe's always hunting for new deals and it's a really proven, tried method. The lack of competition in the Australian market makes it a, it's a gold mine still. Right. And we'll talk about that around multiples and how that works at the moment. But yeah, if you ask owners in.
- [17:28]
Will Smith
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- [18:29]
Matt Kopp
Well, we, we will return kind of throughout the conversation to the Australian market. But anything from this chapter of being a searcher just out there doing proprietary search completely on your own to say about, about, about it or are we good?
- [18:44]
Walker Deibel
It's just, it's a, it's a tough journey. I think everyone sort of, you know, it's a lonely journey. I think that's the sort of common thematic that keeps coming up with a lot of searches, especially in a market where there isn't many. You know, you're trying to explain to people what you're doing. Like all my friends thought I was crazy, you know, dropping a fairly sort of high paid job to go and search for a business, you know, without really any experience. So I think you're constantly not just reminding yourself that you've got a really good path ahead of you, but reminding everyone around you. Like I just had my second kid at that stage, so I had like a two year old who was born and then like my daughter was born in 2018 when I started searching. So I was dealing with a couple of different fronts as well when we were going through that process. But you just gotta have belief in yourself that you know that there's a, there's a goal in mind that you need to try to achieve. And if you push through, I think it's, it's a really good thing. Right. Like grit and resilience is really, really important, a part of the small business ETA journey. If you don't have that, you're going to fail. And I think a part of the search process really sort of self selects out the people who can and cannot do it. And so I think it's a good way of sort of going through that process.
- [19:49]
Matt Kopp
Great, well put. Okay, Matt, tell us about Southern Biological.
- [19:55]
Walker Deibel
Southern Biological was a science biological supplier of specimens. Think when you go to school and you do a frog or a rat dissection. These were the guys who supplied the Australian market with that amongst thousands of other products as well. They'd been around for, in the market for 45 years. Started as a catalog business, effectively printed out some catalogs and just started sending it out to schools. I bought it off a second owner. So the original owner 45 years ago created it. He was like an ex science teacher. I said I'm going to start producing products and making products for schools. I bought it from a chemical engineer who bought it when he was in his sort of 50s as a sort of. He got redundant from his job and then said what am I going to do? And he went and bought this business. So I bought it off him. So very much a scientist, sort of led management for the 45 years before I came into it. And it was a. Yeah, it was, it was a good little solid business. Right. So it been doing around about 2 million, 2.2 million revenue for the last sort of five years. Before I bought it, quite steady, you know, like wasn't really ups and downs, it was just maybe like 2, 3% every single year. Had about 12 staff members working in the business, effectively just working customer service and warehousing and lab manufacturing. And some of the, some of the stuff they make, making a bit of around 350 to 375 and that sort of call it SDE we'll call it. That's the sort of terminology we eventually.
- [21:33]
Matt Kopp
And, and this you had said it was. It's organic material, the organic science supplies. So not the beakers and, and the test tubes. Yes, but yeah, the, the specimens in the pond water I think was another example you gave me in the pre call.
- [21:49]
Walker Deibel
Yeah, so yeah, so they definitely still sold the beakers in the test tubes. But that was like maybe 5% if that lab where what we call about 5% of revenue. You know, they had all these ponds at the front of their sort of factory and warehouse that I was quite curious about when I started doing my due diligence process. And those ponds themselves were just full of different microscopic specimens that they would have effectively a lab technician who would go out each week and go ponding, you know, to try and find these different types of worms or you know, little bugs or little water fleas or whatever it was. And they would then just sort of top like keep propping that up every single week. So that school. So schools would you know, use, you know, you can get like a microscope slide that you sort of have a picture of, you know, some type of specimen. We would then provide the living specimen of that slide so people could actually, you know, kids could see what the live actual specimen is doing. Yeah, plus you know, like we selling vials of back, back bacteria and antibiotics and um, you know, we had, we had cockroaches and we had like a rat farm at the top that was sort of, you know, our warehouse away where there was like, you know, getting pregnant rats to then sell for school so that they could sort of do their pregnant studies. It was a very, very strange, unique type of business. I think what attracted it to me was that it was the only one in the Australian market that was selling it because it was like it's. Who wants to do that type of stuff? Right? It's super ugly, super niche where all the other competitors were just boxing box out businesses where they would probably bring something in from China, pack it down and then send it back out to schools. Yeah, we were actually a bit more value add where we actually created products, added products and yeah, whether they're living or not living.
- [23:35]
Matt Kopp
And given that it was kind of a monopoly, did you penetrate every school system? I mean, did you basically what was the, the growth possibility here?
- [23:45]
Walker Deibel
Yeah, so I think there was two things. You know, we were in one, so they were based in one state and so they, this. They had to think about states of America. Now look, we're like a California of, you know, the, of the whole. Of the whole of the states. They obviously built up a really, really big brand awareness in that sort of. In state Victoria where I live. And so. But they had other, other schools across the rest of the nation that was still ordering some things from. Albeit it wasn't as high a basket size is what that sort of the home state was. So I definitely saw that at a basket size level based on a school, I saw that there was an opportunity to try and scale that up a little bit. So if the average basket size for a Victorian school was $1,000 a year, I thought maybe I could. And every other state was $300 a year. I knew that there was definitely upsell that I could potentially do there. Didn't know how that was going to happen at the time, but I just knew that it was going to happen. I think the thing that was most attractive to the business is that even though there was no contracted revenue, the schools had kept coming back every year, every month. It was almost like on repeat. The other thing I liked about the school market is that you knew what they were buying every single term. So to be able to predict demand was really, really easy because it wasn't so scattered because we have a curriculum and the Australian curriculum is fairly consistent across. So I knew that, you know, in January I'm going to need X amount of this product and then in February I'm going to need X amount of this. Rather than having to sort of guess my demand planning, it was almost like sure, fixed demand planning on a monthly level. And I knew that was going to be really, really helpful from a supply chain and purchasing sort of pattern.
- [25:20]
Matt Kopp
Yeah.
- [25:20]
Walker Deibel
And so. Yeah, so that's why became quite attractive.
- [25:24]
Matt Kopp
It sounds attractive other than the maybe the nature of some of what you're selling, but the in 350sd here would be considered small. Was it also small there? Is that, does that. Is that kind of as small as we might consider it here?
- [25:42]
Walker Deibel
It's so small is small, right? Yeah. So I think the number is the number. You know, I think I went into the process of, you know, thinking I wanted that sort of million dollar EBITDA number that I wanted to try and achieve. But I also sort of was of the mindset of I just want to get in as quick as possible as well. I saw an opportunity to sort of scale and get to a million dollars quite quickly. So it was like for me it was just, let's just get in.
- [26:05]
Matt Kopp
Yeah.
- [26:05]
Walker Deibel
Rather than sort of wait again, self funded, you don't really have the time sometimes just to sort of just wait for that perfect deal.
- [26:13]
Matt Kopp
Great. What can you tell us about the structure of the acquisition?
- [26:17]
Walker Deibel
So structure wise, we bought the end up buying the business for just a bit under three times, including working capital. We put a 15% seller note on the owner over a three year period when I ended up buying back that seller note just because I could get better debt terms once I was actually in the business. So there was effectively bank debt. So it's a bank bank debt financed about 40% of it. There's 15% that was financed from the seller note and then the rest was equity injection.
- [26:50]
Matt Kopp
And the equity injection just you out of your pocket?
- [26:54]
Walker Deibel
No, I had two investors who were able to sort of who supported me along the way.
- [26:59]
Matt Kopp
Okay, and do you want to, can you talk about the structure of that?
- [27:03]
Walker Deibel
Yeah. So we tried to sort of do it like a traditional search fund model. Right. Again, I didn't really have any sort of idea about how to structure these things. I think, you know, if I sort of think back, if I could go back in time now, I would have asked for a little bit more. But effectively, you know, we sort of had that same sort of, you know, third, third, third sort of expectation of how I set up with the investors where it would be sort of a little bit now, a little bit over time and a little bit on performance. I eventually ended up working myself through the journey. And we'll talk about the different types of acquisitions I made and how I was able to beef it up, but effectively had the right to earn up to 35% of the equity at the time. And yeah, that's sort of how we structure.
- [27:41]
Matt Kopp
And how much of your own equity did you have to put in?
- [27:44]
Walker Deibel
None. No, so I didn't put anything in.
- [27:46]
Matt Kopp
Ah, okay.
- [27:47]
Walker Deibel
So it's pure sweat equity.
- [27:49]
Matt Kopp
So you said for a little under 3x which included working capital. So about a million dollars.
- [27:54]
Walker Deibel
It was 1. It was 1 point. Just under 1. 1.2. Yeah.
- [27:59]
Matt Kopp
1.2 million. Okay. And the multiple, now this is a pretty small business but very desirable characteristics seemingly. But the multiple still seems lower than you probably find on a similar business here. Is that the, is there anything to say there? Am I, am I reading too much into it? Is that perhaps the nature of the Australian market where there aren't five searchers who want to buy this business?
- [28:24]
Walker Deibel
I probably paid too much for it to be perfectly honest with you. On a multiple level. Yeah. So I think anything that's probably doing sub 500,000 of earnings you'd probably be two to three times is probably where you're looking for. And then you know, the Australian market, realistically you're not paying over five times or anything less than 2 million of EBITDA. You know, if you're buying something that's over more than five, it's probably, it might be in the software space but I think that's starting to get a lot more competition in. But in general five times is the max you'll pay. It probably averages out around four times in the sub timian space. So 7 million I'm paying, you know, three times, you know, with working capital. I think that was a, in my deal I worked at, they had a balance sheet anomaly on their, on their inventory which sort of gave me a free kick. So it actually probably went back down to maybe sort of in that sort of two, two and a half sort of space. When I worked out there's an extra 400,000 of inventory that I wasn't on the balance sheet, that the owners didn't realize I was on the balance sheet. But yeah, no, from a, from a deal size perspective and a multiple entry perspective, yeah it's between 2 and 5 really. But that, that hurts as well because getting out also means it's probably around the exact same size unless you get scale.
- [29:39]
Matt Kopp
Exactly, exactly. Okay. And we'll probably return to that. The subject of multiples is going to come back up later the, and then the debt. So how, how difficult or not is it to get bank debt to buy a business in Australia?
- [29:55]
Walker Deibel
Extremely difficult. So the bank debt that I got was actually supported by a mortgage to sort of get into, into the deal. So most bank, especially when you're going buying businesses that low, they, they will want full recourse secured by property to actually borrow, borrow the money. And so yeah, there was effectively property backed debt to get into the acquisition phase which was then refinanced into cash flow non recourse a year in. But yeah, so it's almost, it's really tricky right? Like once you have a business it's, it's much easier to, to get debt because you have an asset that you can secure it against but when you don't have an asset to secure it against they affect the banks will always generally say do you have a property to mortgage effectively against?
- [30:49]
Matt Kopp
And if you hadn't had a property, do you think you would have gotten a loan then there were other options.
- [30:55]
Walker Deibel
I was looking at because I didn't really want to put the personal guarantee down and put the sort of, you know, put my, put the house on the line. But you'd be paying, you know, 15, 20% like loan shark type territory when you're really having to sort of try and get that down like three sort of pay down periods over 20% like it was they, the options were there, but obviously probably an option I didn't really want to take.
- [31:15]
Matt Kopp
Yeah, yeah. Okay. And the, and also the leverage you got was just 40% of the acquisition price as opposed to what we might find here, 80, 90%. Sometimes with an SBA loan, not going to happen in Australia.
- [31:30]
Walker Deibel
Doesn't happen. We don't have SBA here. You're never going to get 80, 90%. So I shouldn't say never because one of my deals I did but very, very highly unlikely.
- [31:39]
Matt Kopp
Yeah. Okay, well we'll probably hear about that. And the. So do you think what you said there about it's difficult to get a loan when you are without a business trying to buy a business, but once you're in the business and you can borrow against the business is, which is what you did. Is that, is that a tip that you would offer to, to other searchers to in Australia to kind of try to do what you can to get in the business? Because you can probably refinance out, refinance into something, you know, a loan that's much more favorable to you in the first year.
- [32:15]
Walker Deibel
Definitely. I think what a lot of the bankers are doing when they're trying to sort of assess whether you've got the, the right skill set to run a business is do you have the skill set to run a business? So that's really like they're investing in you more so than investing in the asset most of the time. So even if you come from, you know, McKinsey Bain BCG background and you want to go buy a manufacturing company, they're going to say do you have any manufacturing experience, consulting experience? Even though they don't, they don't generally look it through, they look through the title and the brand and go actually do you have tangible experience? So my. Yeah, I found that out that I didn't really know that that was going to be the case. I sort of found it out the hard way or the easy way, however you like to sort of say it. But yeah, definitely. I think once you have a year in running a business and a small business and you have got cash flow coming through and you've got some balance sheet that you can sort of put on the line, a bank would be much more easy to sort of pass through to say, okay, business already exists. Is it working capital loan? Are they looking for acquisition finance? What are they actually looking for debt for? Is it helping grow the business? That's their bread and butter. Right. But buying a brand new business by someone like a rookie who's got no experience in that industry, that's just like putting all the red flags up for them because there's so much risk inherently in small business, let alone someone who's got no experience running it.
- [33:29]
Matt Kopp
Okay, great. So you get in the business. Tell us about the transition in your ownership of Southern Biological.
- [33:35]
Walker Deibel
Yeah, so the transition was we. What I effectively did was sign the, we had, we had that seller note for three years. So that was always tying the existing owner to the business. So I had a call to him whenever I sort of needed to. Initially. We set a, set up a sort of a, an option, a transition agreement, effectively that allowed me to sort of have the owner working with me for three to six months and then for another an additional six months where I could call upon them. I sort of probably didn't really sort of execute that. 12 months, probably in the first two months. I said, thank you, I don't need you anymore. It was, they became probably more dead weight for me than anything. I think the business I inherited was fairly simple. Right. Like we had schools who were contacting us, we were just giving them product. You know, there was probably some gaps that I had around the technical aspect of the product that I was selling. And that's where I focus a lot of my effort and attention on the existing owner. The existing owner was not a. He was not a businessman, he was a scientist. So he had, he probably went overboard on the science stuff where the customers were really just happy just to take a product half the time. Yeah. And so I think I sort of realized that really quickly and sort of like just downloaded everything I actually needed from him from a science and technicality space because I've got no science background, no education background, just a commerce guy and a finance guy. And so for me it was like, I can probably run the business better than him. I just don't know the content as much. And so, yeah, so that transition period was probably two months initially five days a week, went down to four days quite quickly. Eventually I was trying to be nice and kept him around for two days a week. And then eventually we just sort of had conversations. Hey, listen, I've got you for 12 months on a contract that I can call you. You're done. Thank you, thank you very much for all for your assistance. I'll make sure that, you know. And he still used to like pop in occasionally just to see how things were going. But it was, that was probably more of a distraction than it helped, to be perfectly honest with you. I think. And that's probably because I changed the business quite rapidly and through my due diligence process I already knew what my 30, 60, 90 day plan was gonna look like. And having the existing owner there makes it harder to enact that change. When you sort of feel, you almost like feel sorry for sort of laying out the low hanging fruit that's right in front of you and all of a sudden you're just like taking it all up. And yeah, there was one moment I think that I sort of, we created a little change and he just couldn't believe that that change created so much value straight away. It was almost like it was lying in the face for him. But he was just. For 20 years he hadn't done anything with it.
- [36:15]
Matt Kopp
And do you remember what that particular change was? Out of curiosity?
- [36:19]
Walker Deibel
Yeah. So they had a website but didn't have a payment gateway on the website. So what would happen is people would come through and effectively create draft orders on this website and then they would then take a phone call from the customer saying, here's my cart, can I now pay for it? Which, you know, and that, and most of the time those either I purchase order from the schools or you know, very rarely credit card because they didn't really have a credit. Like there was a big clunky system that they had to sort of take credit card payments. They could only take credit card payments from like one type of credit card and that was it because it was just the systems they had was sort of quite poor. So um, we just, I just effectively got a payment gateway online and we. Cash flow went up straight away because people were paying by credit card straight away. We were getting orders that we weren't getting probably before because people didn't want to have to pick up the phone and they were going somewhere else for something else. It was just, yeah, a really, really quick win.
- [37:13]
Will Smith
The team at Aspen HR recently published a short white paper targeted at searchers. Entitled A New CEO's Guide to Human Resources, it lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought.
- [37:30]
Matt Kopp
The link to download it is in the show notes.
- [37:33]
Will Smith
Aspen is a professional employer organization or peo, run by a searcher for searchers. Search fund veteran Mark Sinatra runs the company, which provides HR compliance, flawless payroll, Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for a fraction of the cost. Go to aspenhr.com or contact Mark directly@markspenhr.com.
- [38:04]
Matt Kopp
It's funny the having the seller around while you're under your new ownership is often talked about as very delicate, often more trouble than it's worth for a variety of reasons. Classic among them being it's kind of awkward for the employees. They're worried about split loyalties, they don't know who to report to, too many cooks in the kitchen sort of thing. But I've never heard this. I don't think I've ever heard this reason that it beats up on the morale of the seller to see you go in there and have early successes. They're kicking themselves. Why didn't I do that?
- [38:40]
Walker Deibel
Yep.
- [38:40]
Matt Kopp
Sort of thing. Yeah. Anyway, what other changes did you make, Matt? Because. Because you said you moved quickly.
- [38:46]
Walker Deibel
Yeah. So first two months. First two months was just sit and learn and bite my tongue really. You know, while I was like wanting to see everything, I got into a habit of asking questions and then realizing the questions I was asking weren't really questions. Almost like backhanded stabs to the owners with regards to why they haven't been doing things. So I sort of learned really quickly to just bite my time and knew that I wanted to sort of pull the trigger on things rapidly. That's why I sort of exited the owners. I told you about the payment gateway stuff. You know we had, you know, five people working in customer service who predominantly his job was just to answer phones and take these payment orders. So initially I sort of had this sort of redundancy set in really really quickly with staff. I also like they were also using like an old archaic accounting system and software and I sort of alluded to before where that they had an inventory error of when I bought the business. So all the stuff I was looking at from there accounting system was under reporting inventory. So that was a really big thing for me to sort of start getting track on inventory. So I needed to implement some type of system to be able to do that. So implemented NetSuite into this business knowing that it was a too big of system for the business of the size it was. But I knew that I was going to be able to scale by having at least data and live data whenever I really wanted. And so implemented a new system, had this redundancy in staff. The system implemented that we implemented also made staff redundancy even more so. So we probably went from a team of 12 to 5 really, really quickly. I'd say like maybe like four months, just cut. It's really, really interesting. Right. Like I think there were some people in there who different layers but like you know, senior people and call them managers, but senior people and these, you know, these are the people that the owner was like, you really need to rely on these senior people because they're the ones who are going to help you when I'm not here. I found the senior people were the worst people to actually have in a small business because they've been working status quo for 20 years or you know, 15, 10 years with this one owner who hasn't been doing anything in them, in their company. Someone like me comes in and all of a sudden I'm giving them a pay cut because they're having to work their full 40 hours a week. You know, there's no longer them sitting around having coffee for an hour and then, you know, turning the lights on, you know, then having a chit chat. Like it's actually no, we've got these strategies now. These are the people I've inherited. I need to get them to work.
- [41:10]
Matt Kopp
Yeah.
- [41:10]
Walker Deibel
And so they're going from 50% efficiency to 100% efficiency and they're not getting anything in return from that apart from me just sort of pushing in the more. It was a bit of a learning for me I think because, you know, I've come from a really sort of high intense work, 80 hours a week type sort of, you know, environment to. I wanted to apply that to small business. And then you've got these people who are there for 40, 40 hours but they're really only working for 20 of them and not. And the standard of that work even in the 20 hours is like probably worth five hours of someone who actually goes in. And so for me I was like, well, I can do all of these people's job, you know, I know it's a scalable but I was really trying to get the business from A to B. I think for me to then scale. So I took on a lot of people's responsibility. It was great because I actually got to learn the Business from the ground up. But getting rid of the dead weight, I think was really, really important. I think in the early days, you know, in hindsight I'm probably, maybe, you know, morale within the office was a bit chipped, but for me it was.
- [42:09]
Matt Kopp
Like, say, say more about that, Matt, because I have to believe that was actually. There was a lot of risk in that and, and that morale was more than chipped. I'm not sure exactly what that, how that maps to, to what American word that maps. But, but it doesn't sound very serious. But it probably was pretty serious to morale.
- [42:28]
Walker Deibel
Yeah, no, it definitely was. I think, you know, I, I went in with a very probably arrogant approach to sort of small business where I thought that, you know, I've got this really great business and for me the business was the brand, the product and, and its customers, right? It wasn't the people underneath. I was actually really surprised by the people that were able to create this business and to maintain it. And I think that's where I sort of said like I went in, I'm like, wow, this business is so amazing because these people here are getting this recurring revenue every single day. And I almost got a bit arrogant because the people aren't really driving this success. It's just this monopoly business. Just being in the right place at the right time, having the right product with not with little competition allows it to sort of be so much greater. And so, you know, firing people who had been, you know, in the business, you know, making them redundant. Being in the business for, you know, some of 15 years had been in that business. Some, one lady had been working the business for up to 30 years who was actually seeing two owners on me being the third owner, which. There's just no value for that person to be there anymore. So there's some people who are really annoyed by that. But I had really frank conversations with these people to sort of say that, you know, I'm there to sort of grow the business, know, secure their jobs even more so. And so I was very strategic with the people that I align myself with. And then the people who weren't happy, they, they, they eventually sort of, they, they didn't, they, they, they left saying that though even though there were, there was unhappiness, the morale was poor. You know, in the, in the early stages when everyone, 50% of the, of the staff got cut, no one left. There was some tears, there was some heated moments, there was some threatened to walk outs, but they all eventually did stay, which was, I still think, you know, they love the company and they, they loved where the company was going to and the trajectory it was going. So I think.
- [44:24]
Matt Kopp
And, and by they you mean the five that remained. So, so seven were letting the five that remain. And then. But, but so just so I. You're crystal clear, Matt, or I'm crystal clear. I hear you say that maybe you were a little bit arrogant and so on. So were you wrong in how you. Because I'm also. Because I'm also hearing you say actually justify the, the way you approach this in a way that actually sounds pretty logical that. Yeah. So.
- [44:52]
Will Smith
So which one was it?
- [44:53]
Matt Kopp
Would you do, would you go back and do it differently?
- [44:56]
Walker Deibel
I would do it a little bit more humility, I think. So would I. Would I still make the same decisions? Yes, I think it's more just the how. It's not the one, it's the how.
- [45:05]
Matt Kopp
I see. So your style was made correct?
- [45:08]
Walker Deibel
Yeah, definitely.
- [45:09]
Matt Kopp
Style.
- [45:09]
Walker Deibel
I think, you know, there may be a better way to sort of let people go and you know, give them reasons for, you know, better reasons, I guess I think, you know, in that sort of early stage I'm just like bull at a gate trying to get, you know, scale and growth as much as possible and you always sort of forget that there is a human element to it. I guess, you know, as a 27 year old who really hadn't managed anyone before, especially like blue collar or sort of, you know, like we'll call it low end white collar staff before the approach and style definitely probably needs to be more well suited. I didn't go into small business with some people go into there because they were. They've won the love of managing and they want to have, you know, they want to create a really good culture. I went into small business to have direct impact at bottom line really. That was sort of where I sort of had a lot of focus on. So when you go in with that mindset you almost forget that there's sometimes people there and they just become well, I'm paying that person 70,000 a year. That's going straight to the bottom line. I'm paying 50,000 to that person that's going straight. Bottom line. It's. It was a bit cutthroat.
- [46:13]
Matt Kopp
Yeah.
- [46:13]
Walker Deibel
But it needed to be done. It was a. It.
- [46:17]
Matt Kopp
It's bloated.
- [46:19]
Walker Deibel
Yeah. Blow a bloated pay now. Yeah.
- [46:22]
Will Smith
And then the putting in netsuite and.
- [46:24]
Matt Kopp
Some of the changes that you made. I mean the, the reduction staff is a big change, but I guess operational changes. Anything more to say?
- [46:32]
Walker Deibel
There Just I think dashboards and data are the, the lifeblood of any growth story. I think. I think, you know, we, for the first, like, for the first time was able to actually see, you know, live sales data, be able to do, you know, like we uploaded all our historic sales. It was like clunky as we needed sort of. I really needed to spend a lot of time on cleansing the data from existing and archaic systems. But being able to sort of use that data and the dashboards that NetSuite were able to provide was really, really important for us to sort of scale and grow and focus on where we wanted to grow. And so I think being able to. The one problem with NetSuite and just putting any new system into places, I think is that someone's got to use it. So again, even though I had gotten rid of most of these staff members, I still needed someone to be actioning the orders and actioning using the system. One thing I always, that's one thing I probably have learned is that someone who's 55 years old has never used a system before. Don't expect them just to watch a YouTube video and tutorial and be a gun at using a software for the first time in one week. So there was a lot of time spent having to sort of hold people's hands through that process. I learned the thing in a couple of months, but I was still six months later, still giving people troubleshooting on how to use the system in the way that I wanted it to be used so that we could enter orders, do quotes, whatever the actual the process was.
- [47:59]
Matt Kopp
While it might have been tumultuous, it doesn't sound like you had fetal position moments. And it doesn't sound like, well, what was the, what was the outcome both on, on, on revenue and on EBIT?
- [48:11]
Walker Deibel
Yes. So year one, we went from 2.1 to 2.7 mil and then grew EBIT from 350 to 650 in the first year.
- [48:20]
Matt Kopp
So. So obviously fantastic performance.
- [48:23]
Walker Deibel
It was a fairly good win. Yeah.
- [48:25]
Matt Kopp
And that sales increase to up to 2.7 came from.
- [48:30]
Walker Deibel
So I think there was a lot of missed baskets that we're not getting initially from the business when because of the payment gateway issue. So I think we're just able to get some stuff that way. Um, an updated website just allowed, allowed things to sort of be accessed a lot easier rather than having to go through 50 pages to get the product that they actually wanted, like just putting best sellers on page one, just something as simple as that. So, you know, we Went through like a, I went through a website, you know, website transformation like really, really early on. So just again, I don't really know to be perfectly honest with you. Like it was year one was about fixing the back end, you know, making things easier for our customers. But anything to do with product development or anything like that, didn't understand anything. I was still learning what the products were, to be perfectly honest with you. So I can't give you pinpoint stuff but I would imagine that the website and no payment gateway was probably just transferring orders. And the cost savings obviously came from staff. Majority of that was just the staff. And then obviously increase, increase revenue margin.
- [49:34]
Matt Kopp
Great, Matt. Well you, you, what happens then? You, you kind of take us along now because I know Covid a lot starts happening quickly.
- [49:43]
Walker Deibel
Yeah. So that's 2019, 2020 Australia. Well, you know, 2020 Covid happens for everyone. So around about March 2020 and our Australian government took a pretty, really significant approach to trying to stem that where they locked us down. So we effectively, everyone got locked down across this country for 30 days was a 40 day lockdown I think in my state. And that meant no work, like we couldn't even go to work. It was like just everyone stay home, the world stops. And that's not different to anywhere else, you know, in the world. At that point in time everyone sort of was really trigger happy just to say stop at the start. I guess for us we're really lucky from a timing perspective because the start of our school year is January to March. So we're just. And that's always a busier time for schools. So we had a really, really good first term I guess for sales, which meant that we generated probably 40% of our initial cash in that first term, which meant that the business had cash flow so it wasn't going to sort of fall over. And so 40 days happens and then what happened eventually is we were able to come slowly come back to work. But because I'd set these systems up, working from home became a possibility probably for the first time this company ever. And I loved it. I loved the fact that I had people working from home and not coming into the office. So these customer service people and lab people and stuff like they would constantly come because they're using this system all the time. They constantly keep coming and barging in my office and asking me for things and everything was sort of important to them and urgent at the time. But in my sort of important, urgent sort of philosophy was like not important and not urgent. I'm trying to focus on scaling and growing this business rather than sort of dealing with problems. And so I think working from home really helped me and helped them because they would only come to me when they actually really like they. So it's the next step. I don't know how it works, but if you're working in an office, walking to someone's office is so much easier. But if you, if you put some type of invisible barrier there of like having to work remotely, they really, really think when they want to speak to you or call, contact you.
- [51:51]
Matt Kopp
Yeah, interesting.
- [51:53]
Walker Deibel
And so, you know, it promotes, you know, someone to sort of do their own thing and take. Take their own, you know, initiative rather than sort of ask someone all the time. It's like the. They sort of. There was used to this thing where someone's asking you a question like, let me Google that for you. You actually send them like a let me google that for you link where just go and type into Google how to do it. That's always almost how mostly came about like people asking inane questions that they could have just shown their own initiatives to go and find the answer themselves. So that was really, really good. So Covid happened. We went to a standstill 40 days, came back and slowly started coming back on live. The rest of the strait opened, but Victoria then went into another lockdown halfway through. Which means that I was the only one. Me and I could have choose one other employee to come into the office, into the warehouse. Everyone was working remotely. And yeah, we just sort of kept pushing through. So Victorian sales was sort of us one state where I live that was put under sort of some pressure. But the rest of the rest of the country was open. So we had a really specific. Our governor at the time, he went really hard on locking down. So it was 100 day lockdown that second time around where we weren't able to leave a 10 kilometer radius effective unless you were like considered a specialized worker or something along those lines that had a permit to go to work. And because we were school supplier nationally, we were passed as a approved worker. So I was effectively running the company with me and one warehouse person and my three offshores, three people working at home, doing everything that we needed to do. And the great thing about schools is that they have to keep spending money. They've got a budget they need to spend each year. So even though we lost all this revenue in that sort of first lockdown and the second lockdowns, it all came still towards the end and then some. I attribute that sort of that Three to four month period of now I can focus on the business. All of the sort of important, non urgent matters that I really, really wanted to focus on, you know, were, were front of mind for me. I had no more distractions. I was actually now focusing on working on the business and growth and how I could actually grow this business organically. And so yeah, introducing brand new products, understanding the gaps, trying to increase that basket size. Not only my home state, but increase the basket size, know across the states. That was all, all, all those initiatives and strategies were all fostered. Then in addition, I guess I think, you know, like we, we started thinking about inorganic strategies as well. I think there's a. I always sort of knew that I was going to get my growth from, from, from buying other businesses. And this was a time when there's a lot of uncertainty in the market and there were businesses that, you know, in my state, know, weren't working because they were in lockdown. And you know, it was, you buy these businesses at today's discounted prices, you know, with a, with a known recovery coming in mind. That's why I sort of said let's just go and do something along those lines as a part of.
- [54:51]
Matt Kopp
Sorry.
- [54:51]
Walker Deibel
I'm going back and forth as a part of my sort of strategy about trying to deliver value. I knew that I had a lacking of science knowledge, but I knew that I wanted to be creating products where I'd probably need some science backing. So I was trying to find how I could sort of hire science people, people who understood science education, science teachers, scientists didn't know who it was. And I sort of came across this business that I'd been looking at for about six months that was a, it's called Hands on Science, which is effectively a. They had a bunch of science teachers who went to schools and taught them science workshops. Because in our school system you don't have science teachers. You've just got like a generalist teacher. And normally generalists in like elementary school, like K to 6 type sort of stuff. Yeah, they're generalists, they're not science people. And so what this business has been doing for 30 years has been going to these schools and teaching the science part of the curriculum where the generalists really couldn't do it because they had.
- [55:45]
Matt Kopp
The knowledge at the elementary school level. For younger kids.
- [55:49]
Walker Deibel
Yeah, for younger kids. And so in that I was like, this seems like a really good opportunity of being able to grab a business that wasn't doing anything at the time, but it had been doing really well for 30 years, but then grab a whole bunch of team who was able to fill the gap that I had with science content, science knowledge. And I sort of said it sort of a really good sort of good, good synergy I, I thought. And so I approached that business in the middle of COVID They were like on the knees, you know, like they just sort of, you know, two old women had run the business for 30 years. They were both in their 60s and they were like Covid. Second round COVID lockdown killed them. They didn't want to go ahead with it anymore, but they had this stuff that they were trying to protect and trying to hold. So I sort of made like a really low ball offer. The business was doing about 650,000 of revenue, so not much money. They were barely making a profit. So I paid about $100,000 for that business in that, in that sort of, that sort of end of that 2020 period and again went through a process of removing the fat that they had there. Within a year's time, that business sort of didn't hit the 650 number, hit about 500,000 in revenue, but we made about $150,000 of profit in that first year. So I paid my money back. But more importantly, I got access to about 30 science teachers. They were all like on a casual sort of basis, but 30 teachers that I could then use to beef up my content strategy that I wanted to do with my Southern Biological business, which was really, really important. So there's a really sort of good sort of synergy that I was able to sort of use from those teachers. And that really boosted again Southern's education offering where we became a. We effectively started printing published in textbooks. We became like the partnership model for textbooks for all science, science, biological, practical and lab assessments that actually occur. I sort of went through to the publishers and said, hey, I've got all these science teachers, we've got all these products that people want. They keep asking us how to use them. Why can't we now be in the books? So we started getting published. So it just sort of started connecting together a little bit.
- [57:52]
Matt Kopp
And so the Synergies thesis worked.
- [57:55]
Walker Deibel
No, definitely, yeah. I wasn't able to learn about science and biology again. Right. I stopped doing science in year 10, you know, at school, so I didn't want to waste my time doing that. So try to buy. Sometimes buying people is probably a really, really good strategy, I think that people don't focus on sometimes, you know, like, I think buying a business not just for its earnings, but Buying for people, I think yeah, really helpful.
- [58:19]
Matt Kopp
Really sure. And returning to the theme of the business being bloated, you had to let people go. Was it basically a repeat of the first story of Southern biological or did you do it differently with the wisdom of a couple years behind you?
- [58:37]
Walker Deibel
So it was only about a year and a half behind me I guess because it was in Covid times I think was a really easy strategy to do. I effectively had anyone who was on like a full time non teaching role will let go. I, I, I told, I told the owners that from day dot that that was going to happen. That there was no need for me to keep the back office. Like they had four staff members who were working full time doing customer service and quoting and doing you know like managing the box, doing like warehouse and the logistics. So the stuff that I already had people for so I didn't need them. So I was really open and honest with them and just said listen I'm keeping your teachers but I don't need anyone else. And so they, that was, yeah, no need to sort of be nice in that process because it was pretty much that's what I'm buying you casual teachers. You're not making any money right now. I thought that schools were going to come back. We weren't going. When we're in the middle of lockdown too, you know, everyone thought the world was over. We're going to be locked down forever. There's such short sightedness. I think for me it was like I knew it was going to pass and I knew that schools were going to need more education, even more so after so many kids being out of school for so long. So I knew there was going to be a really good bump really quickly.
- [59:45]
Matt Kopp
Great. And so where does after buying that business and establishing the, the complementary, the synergies between the two. Where, where do we, where's the next milestone in the story?
- [59:58]
Walker Deibel
Yeah, so I think two months after I bought that hands on science business, I sort of got an appetite for buying businesses. I'm like okay, this is really easy, maybe I should go start hunting. I think what's that sort of Warren Buffett, you know, when, when everyone, when everyone's fearful, be greedy. When everyone's greedy, be fearful. Like for me it was like everyone was afraid at the time. No one really sort of could see the forest for the trees at that time. So I was like let's just go and find out, you know, who else would be willing to sell me their education business. So I emailed like as many I'VE got a hundred different types of email service providers, you know, in the Victorian market I could find and said, hey, I want to buy a business. I came across two music school providers that effectively they managed the music tuition. So again, in the elementary sort of school space where if you want your kid to learn guitar or piano or something like that, the school would outsource that to a company who would then provide music teachers and they would manage all of the. The music lessons. Scheduling deal with the parents. It was almost like a B2B to C relationship. You'd have a contract with the school, but you deal with the cut with the parents with the ultimate end user as a kid. And again, these businesses together they were making, you know, one was doing about 800,000 of revenue, the other was doing about 700,000 in revenue, about $150,000. One was doing about 100,000 on the other line. And I was able to do a really good sort of deal with those two where I bought them. But because we didn't know when Covid was coming back, I was able to sort of tie them to a Covid number instead of said this is what your business was doing. I'll buy it off you at that price, but it needs to hit that price. And so it's almost like putting some risk on them as well to say, do they think Covid is going to sort of bounce back? And they were a bit ignorant to the fact that they had been spending again. Businesses have been around for over 20 or 30 years. Owners who are not really focusing on their business too much through the process. It was just. Just keeps printing hash. Why not? I don't really need to do anything. But I guess for me, I didn't want to really over I had a team of me and four other people as there's five of us, you know, put too many, too much stress on myself with that. So I sort of tied them to that deal under like an earn out process, which meant that they were working in the business for, for me in that business while I could just still focus on all the other things. So they sort of stayed for six months each. When Covid sort of came back, they got a little bit of their money on their own outside, but effectively bought those things for less than 2 times earnings on both side. On both sides. And then merged them together and then ripped out another, you know, we'll call it one time of synergy by pulling them two together. And so again was able to sort of buy another 500,000 of EBIT for for less than two times through that process as well, eventually. And then bought another business as well. There's a circus training school business that went into schools and taught kids how to do juggling and put on school concerts at the end of the, you know, at the end of a term like this. In the end, I eventually had. At the end of 2021, I would have had what is a 1, 2, 3, 4. So five businesses now at that stage. Um, still like the original, the five from Southern. I had maybe three more now full timers that were working across the other businesses and about a hundred casual staff members all sort of sitting there ready to hit 2022 with a bang. And that. That's sort of what happened.
- [63:16]
Matt Kopp
Matt, let's step back a little bit and just kind of reflect now. So, so you've. In three years time, you've become this very entrepreneurial business buyer. You're assembling this kind of portfolio of elementary school education services. Are you? And, and I haven't actually heard, I guess first question would be, I haven't heard any, any examples of hardship. And in fact, you even said, let me, you know, this is. Buying businesses is easy. Let me go out, let me go out and buy some more. Did are. Is it. Are you making it sound easier than.
- [63:55]
Will Smith
It was, or was it, in fact.
- [63:56]
Matt Kopp
Really not that hard?
- [63:57]
Will Smith
Hard?
- [64:00]
Walker Deibel
I think that obviously buying, buying a business, the first business was challenging. I think, you know, the search process was challenging. Covid was that when Covid occurred. It was hard, you know, that first three months I freaked out because I still had debt to pay down. I didn't really, I was ignorant to know that schools would just bounce back and I'd have all that money come through. There was a lot of luck obviously as well, with regards to that first term before COVID happening. I had all that cash, so I was able to cash and no more, you know, no responsibility to pay. I guess what happened was that the government did a lot of sort of wage subsidies over that Covid period. So I was able to get all of my wage subsidy coming through, even though my revenue was actively growing. So I was generating cash. So there were times where I was like, I don't know what's going to happen. But then wage subsidy would come and then I'd be like, okay, great, there's an extra $400,000 of cash that I didn't think I was now going to get. I've now got the COVID Covid made. I was able to buy these businesses that probably wouldn't be able to be bought before for less than two times ebit, you know, all at once within the sort of six to nine month period. So yes, it was challenging, but it was. No, maybe it was maybe just a lot of luck or just being in the right place at the right time. I'm not sure. But there was still a lot of sweat, right? So.
- [65:16]
Will Smith
Well, a lot of sweat and a lot of.
- [65:19]
Matt Kopp
I mean you did take risk and.
- [65:20]
Will Smith
And eyes wide open.
- [65:21]
Matt Kopp
I mean you just said when everyone's fearful, the Buffett quote, when everyone's fearful, be greedy when everyone's beating fearful. So there was a lot of uncertainty as we all remember, around, around Covid, a lot of fear and you were able to discipline yourself or have the whatever the fortitude or the vision to, to strike. And, and so you deserve credit for that at least, you know, intellectually.
- [65:44]
Walker Deibel
Yeah, I guess so. I think, you know, going back to sort of my original thesis of the industries that I wanted to play in, that sort of, if I look back in hindsight that that saved everything. Right. Like if being in the education space or healthcare space, you generally know that things are going to be steady or they are going to bounce back. They definitely weren't, you know, Covid proof. No, there was definitely something. I think if people think they want to buy recession proof businesses, I don't think you ever think about pandemic proof. I think maybe that people will now think about it now because we've gone and lived and lived through it. But it definitely wasn't pand. You know, it wasn't a pandemic proof business, but it was definitely. It bounced back faster than I think most other industries potentially would have. And so that definitely held me, you know, that gave me a really, really good opportunity. But that, that was strategic I guess from the start as well.
- [66:32]
Matt Kopp
Yeah, yeah, yeah, I think, I think it was. I mean you specifically chose education services that and what was it? Health. And so I know you only know the Australian market, but I, I feel like everything you're describing, the characteristics of the education market that you're describing would be true in the States as well. So it's probably true in many places in many nations around the world. So I guess question being. Yeah, I guess is this, this is sector that you'd recommend others, you know, not in Australia, not, not stepping on your toes. Look at.
- [67:05]
Walker Deibel
Yeah, no, definitely. I think, I think education's always going to be there. They've got budgets always need to be spent. I think it's not, not a traditional search business. You know, I think it's effectively a, it's a B2B wholesale retailer. Right. That's effectively what, what, what my first business was. And then the service side of it was just a such a cottage industry. I don't know if it's cottage in the state. So I think that could also turn people away because you're not going to get generally a huge business that's doing what, what my services do. But I think that gives you opportunity to create like I almost effectively started going, let's just create some type of education hold code. Like that's effectively what I was going for. Right. I had all these different brands. Everything in the back office was all integrated but you know, sub like five or six brands out, you know, front end customers. And so for me it was just like, let's just keep buying these things. Like I can integrate the back office. They've all got. If you're buying old businesses that have been around for 20 or 30 years, they've got brand goodwill somewhere, right. So therefore why not just leverage that? And generally schools, they just keep going back to the same customer they know all the time. Like I flirted with the idea of trying to come up with like one like some swanky name that sort of tried to integrate all of them together. But I knew that I wouldn't get any cut through because it's just so hard to attract school customers, I think when you can't just go and get a salesperson out there because if the transaction size is Only less than $1,000 or $2,000 per school, you know, the likelihood of success of having a sales rep out there is really, really hard because the conversion rate doesn't really pay off half the time. And so for me it was just like I'd rather have $2,000 per school and have 50,000 schools out there to go and speak to rather than sort of try and focus all my attention on like you know, big sort of big, large sort of sum revenue price things coming through. So I've just lost my train of thought.
- [68:53]
Matt Kopp
Yeah, well, but well, well the value of having of the value of those relationships with the schools built over decades where you already have the sale has been made, it's almost on autopilot. It's very diversified because it's basically small amount of revenue per school over thousands of schools that is really appealing. And, and from what little I know, I have some exposure to selling into education systems. It is hard. It's kind of governmenty. It's a budget, you know, the budgets Establishing relationships. There's a lot of vendors actually trying to break in and compete for that budget. I'm a little over my pay grade here, but as I recall from an experience some years ago, not the most pleasant place to try to build a business if you already have those relationships. Which of course is what this podcast is all about. Buying. Buying something rather than building it from scratch. It's pretty defensible. It's. It's pretty comfortable.
- [69:50]
Walker Deibel
The customer moat in the school market is really, really strong. I think that's one thing I learned early days. No, didn't know that initially, but you know, it's so hard to market to the decision maker in the school. And because everyone's got their own thing, you've got the principals of a school generally don't spend any money. They're just a face. Then you've got the teachers who might have a little budget. You might have a, A sports, you know, the head of sports or head of science or who. It's really, really hard to A, find who they are, B, get through. You know, you just can't rock up to a school and start selling something to a person because you don't know who it is. And so for me it was like, I don't understand anyone who would want to start a business. But that's when I started understanding what I'd actually had in my sort of structure was a yes, it was great revenue generation and great cash flow generation, but my customer moat was so powerful that I knew that that would be something worth selling eventually to anyone. Because someone who does want to come up, whether in the edtech space or whether in a new product space, they're buying my customers but then buying the revenue as well, that's coming through that, that they can then cross sell. Because that's what effectively we did. As we went along, we started working out which customers are working in each one of our businesses, why aren't they working in each other? And then we could just start cross selling each other's services. Because eventually the person who doesn't know you are the one person is the person who's paying you because you've got the one bank account, you've got the one business number. They know it's all one person. So eventually they go, oh, you're this one person who I keep paying everything into across five or six different services. That then gives you credibility. So then you have a conversation and start negotiating contracted type of works with schools. And that's effectively what we started doing. So rather than just Being a piecemeal person who you come to us every two or three times. You're coming to us here, you're coming to us here. Coming to us here. Why don't we create relationship where we actually work across all of your areas that we can actually service and we can start giving you a discounted rate, but I can actually start increasing my basket size because you're not going any other competitors or you're not using my service because you don't know about it. A lot of the time it's about educating the educators. As I said, I always say, educating your customers. Customers generally don't know everything. Sometimes you need to tell them what they don't know and then once they realize it's there, they. No, it's really, really, it's really, really easy to get that sale when someone else in the classroom beside him is using them.
- [72:04]
Matt Kopp
Yeah. And, and so one of the things that we'll often hear in our world is is this potential of cross selling. So typically talking about a second or third acquisition and how it bolts on or complements the existing platform. And there's always a little bit of skepticism that some cross selling strategy that looks good on paper actually in practice works. Sounds like in your case it works beautifully actually.
- [72:30]
Walker Deibel
Yeah, yeah, it doesn't always work. It's easier sort of put. It's one of those assumptions you can put into a slide deck or the spreadsheet and you get some really free growth from it. I think you need to pick the customer. Well, I think you need to work out. It depends on how many decision makers you've got for the cross selling opportunity to work because they're the people who are going to advocate for your service or product. So I think it, it, it depends on the industry. But yeah, it definitely did work in our front and it's also what led me to try and get my next acquisition. I sort of realized that that's at this stage where I said really what I'm buying is customers. I'm really buying access to customers and they're the hardest thing to, to acquire. And so do you want me to talk to.
- [73:12]
Matt Kopp
Well, and, well and, and then Matt, you had said like when you said the thing about, you know, b. What I was trying to do or what I realized I should do was build a Holdco effectively. Were you saying that that is what you had? Because it sounded to me like you basically had a Holdco. Yeah, a handful of brands, some integration on the back cross selling. So.
- [73:35]
Walker Deibel
So at that point you got intentionally correct Unintentionally. Right, that's what I was trying to say before. Like I, I didn't go into, I didn't go into this thinking that I'm going to go and buy a bunch of small education businesses and create a holdco but effectively what happened after. So that 2021 period is sort of got to the point where I'm like this is what I've actually got. You know, I sort of, I've got a hold code that's like I started like watching the Chenmark guys and sort of saw what they were doing. I'm like, oh yeah, this makes sense. This is, this is what I'm doing. I'm just doing it at a smaller scale but rather than finding people to run them, I'm just doing it myself.
- [74:06]
Matt Kopp
Yeah. And on that point, are you still basically this lone quick moving entrepreneur guy and all of the, the staff and managers within your companies are just, just working on within their little businesses? I mean do you have any right.
- [74:22]
Will Smith
Hand men or women or any management.
- [74:24]
Matt Kopp
Layer that are helping you with this vision and move this whole, this whole now much larger business forward at that stage?
- [74:31]
Walker Deibel
No, I just had people who like we, we acquired, effectively acquired, call it mini operators who were teachers who were teaching some type of service, whether it be science or music or performing arts, who I leverage like a 10 hour a week admin sort of from just as a deal with the people side of things. I didn't want to deal with the people 100 casuals, all probably less than the age of 30, you know, calling in sick whenever they'll call. I didn't want to have to deal with that. So I leveraged some, what I'll call leading teachers to sort of take up some of that admin work. But apart from that, no, it was really just me driving all the things from the top.
- [75:07]
Matt Kopp
And just on that point you seem to have pretty effectively not avoided dealing with people problems. I mean you said in your first business before COVID hit actually you wasn't affected, people were knocking on the door to your office all the time and asking you questions that they could just Google. And so you were just mired in people management. But it seems like later you did a good job of, you know, creating distance between the people problems and just working on the strategic stuff you wanted to. Is that fair? And, and why did you, why were you able to do that so easily? Whereas that's something that so many listeners struggle with. Everyone wants to work on the fun strategic stuff, not the people problems. But it, it's it's very hard to actually do that.
- [75:53]
Walker Deibel
Oh, I was still dealing with the people problems I guess as they come up. I think for me it's just about your definition of what a problem is, I think and where you've put your focus. So I think for me, if I had a people problem I was really quick to it. Like if they don't work, get rid of them, hire someone new and really make it really clear to the people that were working with me at any stage that what success looks like for you is you not bothering me. And so these businesses are small businesses that, you know, we practically got rid of all fixed cost and it was all variable. And so I knew the work was always going to keep coming through. It allowed agility to be able to move through any problem because if something did come up I would just sort of. It's not a, it's so, so insignificant. I wouldn't try and solve every single problem. Any problem did come up and so just put it back to people. You know, there'd be times where the problem got too big, where it was going to take too much my time. I just like quantify and say, well is it worth the $500 I'm going to be getting from it? No. Move on. This is like, this is kept moving forward. So my time became quite valuable because I was managing, you know, four or five different sort of strategies all in one. That, that was really, really important for me I think adding layers of people, it was a strategy I knew that I needed to get to. But at that stage when you're in sort of hyper growth and trying to scale as quickly as possible, I tried to avoid it at all costs. Also given the fact that I'm quite blunt in the way I go about things. So I didn't want to have to make any more people cry along the way. So it was easier for us to sort of have. Just send me an email or send me a slack message and I'll get to it when it's important to me. And then, you know, it's almost like if you call me twice in a row after I sort of rejected your calls, maybe it is important, I'll pick up the phone and answer it. And then even then still would still get probably put into a non urgent, non important bucket in my head.
- [77:47]
Matt Kopp
Well, there's more to the story but I, but I, I want to just make sure we leave time for, for. We're just running out of time here. So let's jump to the Elizabeth Richards story which is a pretty, a pretty wild one. And then, and then we'll hear kind of where you are now. Yeah, so, yeah.
- [78:11]
Walker Deibel
So sort of going back to my sort of story on trying to buy customers. I knew that there was an area in New South Wales, which is another state, was our largest state in Australia, where I didn't have much penetration in from a customer sort of segment, as in, like, it wasn't where it should be based on the size. So I went to a conference and found that there was this business called Elizabeth Richards where all the teachers were hanging at this thing and they were selling like colorful boxes and tubs.
- [78:36]
Matt Kopp
And effectively you're at an education supplies products conference and they have a booth and their booth is being swarmed.
- [78:43]
Walker Deibel
Everyone's there. No one's coming to my booth and everyone's going to theirs. And I'm getting annoyed. So I'm going over and going, what the hell is this business? What does it do? And they were selling plastic tubs, educational resources. You know, think like tables and chairs and really colorful and really like, they had like a color spin on it. So anyway, I was a bit jealous of this business. I'm like, well, you know, then I started doing some research and found that they were, you know, New South Wales. They had a contract with the government for New South Wales. And teachers love them. You know, they had like this one product where it was like the teacher diary, that 75% of all teachers get this teacher diary, and they buy it from them every single year. Like, they've got some really good teacher goodwill. So anyway, I contacted the business owner for pretty much like four days after the conference. And he replied, like, straight back, said, sorry, I'm already dealing with another person to sell my business. And I was really upset because I, like, I really, like, I knew that he was obviously selling. I'm like, I want to do this. I know that there's a really large private equity player who's been rolling up these education resource companies. And so I just knew that that was the person who would have been buying the person buying Elizabeth Richards. So I just went back to him like, is this, you know, is this private equity fund the one you're dealing with? And he's like, of course it is. And so I just sort of went back to him and said, you know what? Like, I'll do better terms. They're probably going to be doing roll in. They're probably going to be getting you to stay back. Like, whatever they, whatever they're giving you, I'll give you 100% cash up front at this stage. I, I hadn't figured out how I was going to do that, but I got into his ear and was able to sort of get him to sort of come over to me and he got rid of those guys and we were able to effectively do that transaction.
- [80:14]
Matt Kopp
And so he told you what they were offering and you took him at his word and just said okay, here it is in cash.
- [80:20]
Walker Deibel
It was a really timely thing. I saw. There's obviously more to it. Like I saw the P and L of this business and it was, you know, it was doing circa seven and a half million of revenue, eight million revenue, about a million dollars of ebit. And so the margins I was making in my science business, which is a similar business of buying and selling products to schools, I was making nearly 30% EBIT margins at that point in time. And this guy was making like sub 15. And so for me I was like there's 15% that I can easily just strip out here somewhere.
- [80:52]
Matt Kopp
Effectively doubling ebitda, doubling earnings, get it getting close to.
- [80:56]
Walker Deibel
Yeah. And so I said I just have to take it. So I bought it, I bought the businesses five times. I bought it for $5 million.
- [81:04]
Matt Kopp
And how did you come up with that sum?
- [81:06]
Walker Deibel
Yeah, so the guys talking about the debt before. So like there was a, because of COVID the government was starting to offer Covid affected businesses these sort of short term or these, these like incentivized loan schemes where it was predominantly for working capital. But I'd spoken to my banker and we worked out that acquisition finance was a way that we could try and get access to this loan and that was effectively government backed which allowed it to have sort of a capped interest rate. So I think I ended up buying, getting that full $5 million interest only for the first year and then over a 10 year period at a capped rate of like 5 and a half percent which at the time is quite good. And so I was able to leverage that and just use that full amount to then sort of fund the deal. And then I had to borrow a little bit of money against my other company just to fund some of the working capital. But yeah, effectively was able to do a 100 debt buyout of that, of.
- [81:56]
Matt Kopp
That business because of the, because there was this moment in time where this kind of COVID related scheme was going on.
- [82:03]
Walker Deibel
Yeah, and like I think when I found out about that scheme, like I was like I want to go use every single dollar I can get access to. And so I think when he came back to me saying that it's 5 million, that's what it's for. I'm like that makes. That fits the bill perfect. Let's just go for it.
- [82:16]
Matt Kopp
Wow. Wow. That is good fortune that there was this.
- [82:21]
Walker Deibel
Yeah. Well, it's interesting right? Be like. Because like we were actually in the second lockdown in 2020. There was like another lockdown that occurred at that point in time. And I was buying this business at a time when he was in another state and I wasn't actually allowed to leave the state. So I bought the business without looking at it. Like I got there like doing FaceTime, walking through the warehouse. I was getting. Trusting the staff to do an inventory sort of inventory stock take to make sure the inventory was what it was. We obviously had, you know, stuff in us in our. Yeah. So chef share by agreement where you know, I could call upon if there was anything new discrepancies. But to buy a business for $5 million was the biggest amount of money I'd ever spent on a business up until that time without even looking at it over a 30 day period. Like it was a rapid time because I said to this guy, don't go because he was like quite well into it. I don't think he had any, any loi or anything where there was exclusivity with these other people. But I said I could move really, really fast. And I did.
- [83:15]
Matt Kopp
Wow, great. So, and so that was a not. What did you say?
- [83:18]
Will Smith
A nineish million dollar business.
- [83:20]
Walker Deibel
Not. Yeah, eight mil revenue.
- [83:22]
Matt Kopp
Eight million in revenue. And that was. And what was the. Your existing Holdco in aggregate, what was revenue at that point?
- [83:28]
Walker Deibel
At that time? Probably five. Around five or six.
- [83:34]
Matt Kopp
Okay, so. So after this acquisition you're now 13, 14 million correcting revenue.
- [83:38]
Walker Deibel
Yep.
- [83:39]
Matt Kopp
Yeah.
- [83:39]
Walker Deibel
And even that would have been about 2.5. Including the one probably about 2.5 at that time.
- [83:47]
Matt Kopp
Two and a half. Circle us back to the deal with your investors, the terms with your investors. So you've I assume done really well according to the, to the, the performance metrics or hurdles in, in the structure with the investors. Can you elaborate?
- [84:05]
Walker Deibel
Yeah. So I think what happened was we obviously search is always about having an exit and you don't really think about how do you create a vehicle where there's maybe a permanent Holdco or something where you no longer actually have to get that liquidity event to get that third tranche of investment, the sort of. Third, third, third. So I went back to my investor and said listen, you know, if I was to sell this thing now I'm already above 35% return. I'd already returned their initial capital back through dividends over, over the time. So they'd already had their initial capital back and they knew that the business was where it was. And I think to incentivize me, they sort of said, we don't want you to stop, we want you to keep growing. We're just going to release that equity. Trance. So I effectively became a full equity partner from just before the Elizabeth Richards. So that was probably after like the COVID period. I bought those five businesses through that process, became a full equity partner in with no more vesting required or anything along those lines, and then was able to start taking dividends myself.
- [85:05]
Matt Kopp
So to be clear, the structure modeled after a traditional search fund was you would have gotten a carry, you would have gotten a percentage 35% of beyond, you know, if you say hit certain hurdles of the proceeds of the entire project.
- [85:23]
Walker Deibel
Correct.
- [85:24]
Matt Kopp
Upon exit. Upon exit. But you didn't want to exit. So it was like, how does Matt get to take some chips off the table, get to have a liquidity event while continuing to grow these businesses? And so, and so they. So your investors released the agreement that you needed to actually exit the business and return capital to them for you to get your carry. Instead they just said you've earned your 35 or maybe now a little bit more percentage. You now have 35% of the entire enterprise.
- [85:53]
Walker Deibel
That's correct. Yep.
- [85:55]
Matt Kopp
Yeah. Great.
- [85:55]
Walker Deibel
So that was.
- [85:56]
Matt Kopp
I wonder if that happens in search fund land among traditional searches.
- [86:00]
Walker Deibel
It should, right? I think it really should because it's incentivized if someone to keep growing rather than trying to get out. You know, like if you can compound your returns, why wouldn't you. I think that that's. There's a misalignment there, I think between investors and searchers where that, that third tranche really only comes out in a liquidity event stage. I think if you can try and work with. Align the incentives a little bit more to try and get growth like I think any investor is happy for 35%, you know, in 10 years time. If that can be compounded. Why would you try and incentivize someone to sell too early just so they can take some chips off the table?
- [86:33]
Matt Kopp
Yeah, yeah. Well, in, in there are cases of this, this came up at a panel recently where a searcher, the searcher often wants to sell for precisely what you're saying because they, they may never have had a liquidity event in their life. So this is the first moment that they're going to come into real money. And so they're eager to, to do that.
- [86:51]
Will Smith
So the searcher wants to sell.
- [86:53]
Matt Kopp
If they know that they will have hit their hurdles, whereas the investors are saying just keep, they're, they're, they want you to keep compounding. It's hard to find a good business with a good operator. You're a known entity, the business is a known entity. It's car carrying along nicely. There's a whole long future, more growth that they can envision. If they sell and you return their capital to them, they're just going to have to turn around and figure out where, where to deploy it tomorrow. So they're incentivized for the searcher to stay in the business. But then the searcher never gets their liquidity event or doesn't. It keeps being postponed and postponed and postponed. So this is an interesting way to do it. On the other hand, I will say, Matt, you didn't have liquidity event. You got that equity that you now own, but you didn't get cold hard cash, correct?
- [87:35]
Walker Deibel
Not at that stage. Yeah. Not, not, not at that stage. I eventually did. I think as soon as that happened, I think I became more of an investor rather than operator, you know. So we're talking three years into the journey now, three and a half years in the journey when that occurred. As soon as I knew that I was now in the money, we'll call it, my whole mindset changed of how I was now going to grow because I was no longer now an operator working for someone else or working for investors. I was now a part shareholder of this strategy. And now I sort of said, okay, now where are we going to start allocating capital? So I started taking more risk, going down 100% debt into buying a deal, trying to figure out how I could try and exit and try and make some really quick wins along the way. And so I think that mindset shift is really, really important. I think that sort of drives you and you should think like an investor from day one, but you don't. The honest answer is as a searcher, you are working for your investors to try and get to a hurdle so that you can get something back for it. And so you have a board or you have some type of sort of governance in place where you are still working for someone even though you might feel that you are doing this all alone, you're not financially and the economics even stated that you are working for someone else because you got to return something back to them before you get anything Yourself. So I think once you sort of release those shackles and you start to become more aligned, it does change the way that you think about things. And your 10 changes your duration. Your duration mindset talks about how you actually start allocating capital because now it's yours. Before it was like I've got a free hit. Now it's like well no, now it's actually something and it means something to me. And so I think it's really, really important that you can get that with an investor. I only had two so it helps. I didn't have 10 or 15 panel. It allows you to sort of start thinking a bit more strategically and say.
- [89:15]
Matt Kopp
More like more long term, more patient, more.
- [89:20]
Will Smith
Higher risk tolerance or lower risk tolerance.
- [89:22]
Matt Kopp
Now that it's your capital you would.
- [89:25]
Walker Deibel
Make the assumption that lower. You have lower risk tolerance. In my scent it was probably the opposite. But yeah, I think your duration so timeline sort of starts being pushed out a little bit more because you don't have this burning platform to get this thing done in five years. But you can also start thinking about like hold co strategies and thinking about you know, what does my next sort of, you know like where, where I'm going to start putting my money. Do I want to be putting my money in my pocket? Do I really want to leave the money in the business to sort of start growing, you know, more, buying more businesses along the way? Like you start having that sort of approach of taking some money. You know, we start my investors and I started sort of saying okay, we'll have a 50% payout ratio from now on and start thinking about how those type of payout ratios exist. Where as a searcher you're not thinking about that. You don't really generally have those conversations.
- [90:09]
Matt Kopp
You're breathlessly just trying to get to your single liquidity event.
- [90:13]
Walker Deibel
Correct.
- [90:14]
Matt Kopp
Are you going to tell the audience about the call you got the day after you closed on Elizabeth Richards?
- [90:20]
Walker Deibel
Yeah. So yes, we closed on the 1st of October. On the 2nd of October I got a phone call from the private equity fund that I beat out on the Elizabeth Richards deal.
- [90:32]
Matt Kopp
Whose deal you stole.
- [90:33]
Walker Deibel
Yeah, correct. And like it's like an ankle biter, right. Like I think I'd been biting these guys ankles. Anyway, my other businesses for solo. So they knew who I was and I think they were quite self sucked that I effectively got that got it from them. And that's sort of when they came to me and said oh you know we've been looking at you for a while. You know we love everything You've been creating. We'd like to buy everything off you. And it was like, I've just had this business for a day. And the other business like, oh, we want to buy everything off you. And we're like, okay, that's great. Um, but the offer they were offering me for the Elizabeth Richards side was quite small. Obviously, I don't know it for a day. They were trying to, trying to give me effectively a million dollars finders fee for that bill and then, you know, just. But give me a fairly good whack on my other businesses like 6x effect on everything else, which is great given the fact that I bought the original for three and the others like one and two along the way. So I was getting a really good arbitrage opportunity on those. But I knew that I was going to really get a good whack on the Elizabeth Riches. I knew that I could really drive some growth value in that. So sort of that, that disappeared effectively. So we put that on hold.
- [91:32]
Matt Kopp
So you said no, you declined them.
- [91:34]
Walker Deibel
Yeah. Went, went through that process. Correct.
- [91:36]
Matt Kopp
Be because you thought the Elizabeth Richards deal was undervalued even though it basically you would have made a million dollars in a day.
- [91:44]
Walker Deibel
Correct.
- [91:46]
Matt Kopp
And even though when you talk about the, the, the, the existing Holdco, that's fantastic. Multiple expansion from twos and threes up to six.
- [91:57]
Walker Deibel
That's correct, yeah.
- [91:58]
Matt Kopp
And, and even though you know this Matt was your perfect buyer, there's not going to be a more strategic buyer. They are a Holdco of education services. So they're in your industry. You're on their radar. They know you, you know, they want one of your businesses badly. They almost bought it themselves, you know, until you snatched it. So I'm just, I'm, I'm. Well, tell me more about the decision.
- [92:27]
Walker Deibel
Not, you know, it's just, I think there was just a lot more value to be created from that, from that first business. So from Elizabeth Richards, like I knew that they were the only. And I think they were also I'd mapped out where they were in their strategy. So this business had just been sold from another private equity to. So to private equity swapping businesses, as they always sort of do. I know we're like one year into the, into their journey. And so like I think the way private equity works is that they were really acquisitive in the first year and then, you know, they were sort of, you know, my second year they might do what they need to do and then they sort of bunker down for the sort of years, three to five. And then towards the end they might try and top up some more. So I sort of thought that they were going to come back eventually or I thought, I hope they were. So for me it was like, well, why don't I just sort of do what I know I can do in that Elizabeth Richards business and then we'll see what happens. And that's eventually what happened. So we've effectively stripped out about $800,000 of cost out of that Elizabeth Riches in one year. Merged warehouses. With the merged warehouses, we had cut the fat again, as I sort of had done previously. We saw the same playbook. Revenue had not grown. It was effectively flat. It was in the time of when all the freight costs went up massively. I had huge freight cost chart increasing everything importance with china was from $5,000 a container to $50,000 a container. So actually hurt my, my gross profit pretty much stayed flat. We had revenue growth, but gross profit maintained. So all of my growth in the bottom line came from cost out program. One year in, I'd only been paying interest only on my debt. This full field of like five and a half million dollars of debt that I put through. And then I knew that I had this like burning platform of running. I have to start paying down my debt in year two. And so started sort of, you know, flirting with the idea of, oh, maybe I could get these guys to give me a call again. And just started like liking some LinkedIn posts of the business development guy that I'd sort of had been sort of meeting and just trying to get back on, you know, like, just so I don't, don't forget about me. And funny enough, he gave me a call. He's like, oh, how you been? How's Elizabeth Richards going? I'm like, oh, it's great. He's like, how are the other businesses? I'm like, great. He's like, because we might be in the mood to talk again. I'm like, oh, I probably. And at this stage, I think I'd worked out that obviously created some good value with Elizabeth Richards and my other businesses were even I entered like the health education space through my science Southern biological business. So we were doing really, really well. And again, thinking like an investor now, I was like, okay, well, I'm like, I'm not selling everything, but I'll sell you Elizabeth Richards. I know you really wanted to get that one. And they're like, oh, what about everything else? I'm like, no, I'll sell Elizabeth Richards to you though. And so effectively we Were able to sell Elizabeth Richards and make about a $4 million profit in that 12 month period while keeping my other business is. That's effectively where we sort of ended up. So.
- [95:09]
Matt Kopp
Congratulations Matt. So you, you were absolutely, you played it perfectly.
- [95:13]
Walker Deibel
Yeah, I think I was just again you talk about, you know, hardship or being scared or you know, getting back to the wall. It was, it's a hard decision to say no, but it was a harder decision I think to. Yeah, it was a strategic decision. We'll go on to say maybe it's hard, but it was, it was a good, a good pathway.
- [95:30]
Matt Kopp
Good for you. So, so you could have sold it for a million bucks more than you paid for it. Instead you held on to Elizabeth Richards, took out 800 improved, improved earnings by 800,000. Yep. And then over 12 months and sold it for 3 million over what they'd originally offered you. Do I have that right?
- [95:51]
Walker Deibel
Correct. Yeah. So it was about $3.8 million in total that once we sort of all the working capital drops and everything occurred. But yeah, it was effectively a 3.8 million profit.
- [95:59]
Matt Kopp
Good for you.
- [95:59]
Walker Deibel
I got rid of all my debt, which is really cool as well.
- [96:01]
Matt Kopp
Did you have your liquidity event then?
- [96:03]
Walker Deibel
Well then I did right for myself personally. I was able to take, you know, my money off the table. We were able to do some rejigging on the equity side as well from, for within my investors so effectively got up to 40% equity now in my, in my. What's now my sort of baseline companies, they're doing about 2 million of EBIT now under management. Like I've stuck them under manage. I got a manager finally in place. I think once you've can know the business inside out, it's really easy to get someone in place to go and manage those types of things. And yeah, I'm now effectively sort of an investor, effectively call it with my sort of passive income coming in from my original businesses and my liquidity event giving me my sort of chunk of money that I have something to do with and yeah, it's good, good times now.
- [96:48]
Matt Kopp
Yeah. Matt, congratulations. I mean you are really sitting atop the mountain here. And how old are you?
- [96:54]
Walker Deibel
I'm 40. Turning 40 this year.
- [96:56]
Matt Kopp
Okay, good for you. That's, that's really exciting. So to close this out, what you, you are working on something again with sort of the investor mindset now. What is that?
- [97:09]
Walker Deibel
Yeah, so I think, you know, after this, me, my, my, my. One of my main investors who's now my business partner, we sort of flirted with the idea of like, let's just go and do a Holdco ourselves, let's just keep buying more of these businesses and you know, just do what we've done over and over again. I think we just keep finding the issue with people. You can't really go and find a really high, a type sort of player to go run a pest control business, for example. So the hunt for talent was really, really important for us. So that's where we sort of went to some people and said, hey, you know what, this is what we've done, maybe we can institutionalize it. And so we set to raise effectively an ETA style incubator where we've raised, we've raised $30 million of private equity funding to then go invest in people First Private equity call it so Enduring Investment partners is what we've just set up. And we're looking at finding four CEOs for the Australian market under a similar type of search model where we've got the back office, we've got the database, we've got the interns, we've got all that back office set up and we're effectively finding people who would have thought about search, but maybe search is a bit too hard for them, you know, on the traditional front. But going with a private equity fund that's focusing on that type of sort of same search mindset gives them a bit of safety and gives the experience of what we've had going through this process. So that's the first of its kind in the Australian market. It's similar to some of the, some of the other incubators that exist in the US and the European markets. And we're really trying.
- [98:38]
Matt Kopp
Why did you choose the model of kind of positioning it as a place for searchers or mid career people to go search as opposed to just being a traditional private equity fund and having operating partners? Because in your model you'll share much more carry with your, your searchers, if that's what you're calling them. Yep, I don't know what it is, but let's say it's traditional search Fund Economics, 25%. Whereas in a traditional private equity fund if you guys just source the deals, did the deals yourselves and put in operating partners, you could do that for a lot less than 25% carry.
- [99:12]
Walker Deibel
There's definitely the reason why the model exists is because there is an unquantifiable at the start, but definitely, I think at the end a quantifiable alpha that you get by finding someone who is young, mid career hungry, potentially working at a bainer or a McKinsey or something along those lines. Who wants to go and run a small business? I think that hunger and that sort of, that horsepower that they can offer in a small business is always going to outdo a 55 year old gray hair, old head. I think Graham Weaver from Alpine Partners does it really, really good where he talks about sort of the experience versus time and where that if you find someone with not much experience but have got time to grow, there's this triangle of sort of opportunity that you can really sort of create extra alpha on. So we want people who can really try and project and grow and we feel like you're only going to get that in a. And not to be ages but a sub 40 year old exec who hasn't probably hit the peak yet but wants to have some impact in a small business. The Australian market requires follow on capital. Inorganic play is a really, really important factor as well. And so for us I think someone who can actually go in and have the grit and resilience to do eighty hundred hour weeks like I did, to try and grow and scale both organically and inorganically is really, really important. Someone who's been sitting at a GM level or someone who's been sitting as a COO or something of a larger enterprise, who are the operating partner types? They're used to having people around them, used to sitting in meetings, used to having the infrastructure. It's really, really hard to sort of get that person to come down into a 1 to 3 million EBIT space and actually drive through it. Because it's dirty, right? You've got your back to the wall, you need to get through the mud and you want the mud on your face to get through it. I don't think, unless there might be exceptions, there might be people out there who are that operating partner sort of mold. But for us, a 35 year old ex consultant, ex banker who's got a bit of hunger and grit and you know, that drive, you know, and that smell of money like that's really, really important.
- [101:12]
Matt Kopp
I think that's really interesting. I've never heard it articulated that way or making a lot of sense. Great Matt. And so enduring. What was the name of the project or the firm?
- [101:25]
Walker Deibel
Enduring Investment.
- [101:26]
Matt Kopp
Yeah, and great. Well Matt, you and Simon Plummer, also in Australia, who I had on a few months ago, who also has kind of a long term vehicle and Pete Seligman, who's, who was one of my early guests. I don't know how active Pete still is in the Australian market. He's pretty active. It's pretty interesting how the searchers that I've interviewed in Australia who then been, I think it's, I might be forgetting one or two others, but maybe not actually then graduate to becoming sort of the elder statesman of ETA in Australia, which I guess goes to show that it's a very small market and by being somebody who's one of the few searchers who's had some success, you can then kind of graduate to be somebody who kind of pays it forward to the next generation and is involved in their deals and kind of becomes a bit of a, you know, thought leader, I guess.
- [102:25]
Walker Deibel
So I think the market's so nascent, right. So I think, you know, no one's really doing this, you know, at scale in the Australian market. And that's just because the debt, the SBA in the American market, that is what's driving value, that's what's driving deals to be happening. The Australian market just doesn't have that liquidity. So I think it's a really good spot to be playing in because if you can buy things at threes and fours, even if they're long term whole businesses, the returns are unbelievable. So while there's no one playing in the pond, I might as well try and lap it up myself as much as possible because as soon as it gets start, you know, I don't want to, I'd hate to be having to work in a really hyper competitive market like, you know, it is in the States. So. Yeah, yeah, I'm sure if people could go back 30 years, you know, before people ETA was in Stateside, you know, they, they would tell you the same sort of stories of how easy it is and how, how lucky they were to be at that time. We're just 10, 15 years behind, you know, the state. So we're in that lucky time now. So I want to try and leverage it as much as possible.
- [103:21]
Matt Kopp
Yeah, yeah. And so is enduring active now? Are you, are you actively soliciting your workers?
- [103:30]
Walker Deibel
We've got, we've got two CEOs that, that, that are starting in the next month or two and still recruiting two more at the moment. So again, still the type, you know, we've got an ex HRG private equity and Bain guy, we've got an ex BCG guy who's starting with us. So we're really trying to target that really high end talent and with the backing of the fund, it sort of makes that risk people take in a traditional search takes it away a little bit because they know they're coming to a bit more establishment. They've got people who know what they're doing and have worked in this type of space before. It's yeah, hopefully one plus one equals five.
- [104:04]
Matt Kopp
Great Matt. Anything else you want to share that we didn't get get to?
- [104:08]
Walker Deibel
No, I think, I think we covered most I probably spoke too much anyway so thanks.
- [104:12]
Matt Kopp
No, it's great. Fascinating story Matt. I I, I feel out of breath listening to to you're you're a fast talker but a fast mover. I mean you've packed a lot into your years since you got into this and back in 2018, 19. So pretty aside from what you're doing now, you built the passive hold co this is the dream for a lot of searchers definitely. So great. Congratulations Matt and thanks for sharing with us.
- [104:38]
Walker Deibel
Thanks Will all the best mates.
- [104:39]
Will Smith
Hope you enjoyed that interview. Don't forget to subscribe to the Acquiring Minds newsletter. We send an email for every episode with an introduction to the interview, a.
- [104:50]
Matt Kopp
Link to the video version on YouTube.
- [104:52]
Will Smith
And soon key takeaways, numbers and more essentials from the interview. For those of you who don't have time to listen or watch it, subscribe at acquiringminds code. You'll also find all our webinars there on the website, both those we have coming up and recordings of past webinars. At this point, There are over 30 webinar recordings, a wealth of information on all the technical nitty gritty of buying a business.
- [105:21]
Matt Kopp
Acquiringminds copy.